The Magic of Mixed-Use:

Condos Drive Deals But Hotels Drive Condos

By Jim Mouzourakis

We all have heard by now how condominiums are subsidizing five-star hotel developments. Truth be told, this may be somewhat overstated. Condos are indeed the most economically viable land use and a big driver in luxury hotel development, with values often achieving $1,000 to $2,000 per square foot.

But a hotel brand can bring cachet to a condominium project that positions it significantly above its peers and differentiates it from its competitors. Hotel brands can also vastly broaden the market and target audience by appealing internationally to multihome buyers who recognize and prefer the brand.

This provides a competitive advantage and marketing edge that contributes to accelerated sales absorption, most importantly, and greatly enhances the value realized. Meanwhile, the recovery in the market, shrinking cap rates and significant growth in revenue per available room are allowing five-stars to become justifiable on their own accord.

So condos drive deals, but hotels drive condo deals.

As with the symbiotic relationship of these two friends, a project can expand its circle by bringing in other like-minded friends to its playground. Enter the world-class spa, the celebrity-chef restaurant, luxury-brand boutiques and so on, and what do you have? A "lifestyle" development thoughtfully executed for the consumer.

One could think of these mixed-use developments as minimalls where the components collectively become the draw that attracts the consumer. These components not only bring convenience, but they bring vitality, and together they create value. Most importantly, the consumer will pay for it.

Benefits abound

There are many benefits to a mixed-use development for those involved. First, there is enhanced development viability for both hotel and condo development that could be too prohibitive individually.

Second, there is the ability to accelerate development by fracturing up the density into more manageable pieces if the gross buildable area is too dense to absorb in a market for a single purpose use.

Last, there is the opportunity to spread and/or reduce risk by having investment revenue flow through multiple revenue streams. This creates a nicely balanced ratio of variable to fixed/stable cash flows (i.e. from fixed leases) as well as from diversified market sectors like hotel, office and retail.

Meanwhile, the economies created from shared facilities and services add additional benefit to mixed-use developments. These can include parking, mechanical, management, concierge and valet. Add to that the cross pollination of business between components and you have a setting that benefits both business owners and customers.

For example, the condo owner can order room or housekeeping service on a pay-per-use basis, while the hotel can realize added business from condo owner's visiting guests or added dining revenue from both, while the office caters its events from the hotel, and the retailer has built-in business from the hotel guests and residents.

Cautionary points to consider

We always must consider the negative. While there are many benefits for mixed-use developments, they are not always the pertinent choice. Preselling condos with escalating construction costs can dilute profits. Some developer sales rescissions have happened recently because costs exceeded gross sales revenues.

We also must consider the real-estate cycle. If there is a downturn in the current cycle, which there is bound to be, there will be increased risk of default from the minus prime (high ratio debt and resultant defaults) on lower-tier projects.

There also are many legal woes to consider in mixed-use developments. Among the considerations are titles, separate voting strata councils, allocation of operating costs for shared facilities, separation versus integration of services like lobbies, parking garages, staff facilities, access and egress, ventilation, separation or consolidation of strata plans, air spacing, cross-easements for rights-of-ways, access, usage, etc.

This may all sound like too much of a headache to even consider, but done right, the gains can be exponential and worthwhile. The caveat is, however, as the old axiom goes, "it's all in the details," and you can't stress this enough.

Conflicts need to be anticipated and avoided to ensure success. Also, the more uses, more creative the design, tighter the site, more people/partners involved, the more the complexities. Having said this, all the more exciting the project can be, the more successful it can be, too.

When considering all factors-risk, return and ultimately, the end experience-mixed-use developments often can be brilliant. Few projects are as exciting to do as are they for the consumer to buy into. Done right, they can produce extraordinary yields unlike any other opportunities in the marketplace, but they require the savviest of developers capable of delivering exactly the right bundle of goods.

Jim Mouzourakis is a founding principal and the Managing Director for Canada at Paramount Lodging Advisors in Vancouver, BC, www.paramountlodging.com. Contact him at jim@paramountlodging.com or call 604-761-2711.